1. Introduction
Governments around the world use an assortment of policies to boost economic growth and to improve the quality of living for their citizens. Governments engage in Demand-side and Supply-side policies to effect change or achieve their desired outcome in their respective economies (Pettinger, 2017).
Demand-side policies entail Fiscal Policy and Monetary Policy. Fiscal policies include adjusting taxes and increasing government spending while Monetary policies include the adjusting the supply of money and adjusting interest rates.
The Demand-side government policy has been getting the lion’s share of news coverage ever since the Global Financial Crisis. Before 2008, the layman on the street would have never heard of Monetary Easing (Quantitative Easing) or what the FOMC (Federal Open Market Committee) stood for. Today, the financial news debate on hours if the Chairman of the Federal Reserve will raise rates in the next quarter and the common man knows that it would affect him in terms of borrowing costs or simply the increase in mortgage payments.
While Fiscal policies and Monetary policies are effective during a recession to stabilise prices and stop the bleeding in the financial sector, they do not ensure long-term economic growth (Pettinger, 2017).
To achieve long-term economic growth, governments can enact various supply-side policies. These policies are: Encouraging population growth, Importing foreign labour, Increasing workforce participation, encouraging Domestic Savings, attracting Foreign Direct Investments, encouraging Research and Development, improving the Quality of Education and Continuous training and lastly promoting Free Trade.
In this report, we will discuss how various governments use both demand and supply side policies to achieve long-term economic growth and macroeconomic stability in the short run.
2. Encouraging Population Growth
Population growth is a pressing issue with developed countries. With advances in healthcare, people today are living longer and thus require more care and more social security (Smith, 2008).
With an ageing population, countries need to closely monitor their population replacement rate. To achieve replacement, countries need to achieve a Total Fertility Rate (TFR) at 2.1 children or higher (Searo, 2018). If the population is not replaced, the younger generation will have to pay more in taxes to support the older generation who require social assistance. This is known as the Old-Age Support Ratio.
Let's take a look at Singapore which has a TFR rate of 1.20, which is well below the replacement rate and the policies introduced by the Singapore Government to encourage population growth (National Population and Talent Division, 2013).
In 2012, there were 5.9 working citizens supporting one senior citizen. This fell to 4.9 (Old-Age Support Ratio) in 2015. The projections for the year 2020 are 3.6 and 2.1 in the year 2030 (National Population and Talent Division, 2013). This is clearly a “Silver Tsunami”.
The government of Singapore has enacted the “Marriage and Parenthood Package” to drive the behaviour of Singaporeans and to incentivise them to procreate.
a. Housing. Priority allocation in government subsidised housing in which 80% of the local residents dwell (HDB, 2018).
b. Conception and Delivery Cost. Government subsidies of up to 75% for Assisted Reproduction Technology such as Invitro Fertilisation (IVF) for couples who have difficulties conceiving.
c. Defraying Child Raising Cost and Healthcare Costs.
(1) A baby bonus of SGD 8,000 for the 1st and 2nd child, SGD 10,000 for the 3rd child onwards (MSF, 2018).
(2) Creating a CPF Medisave Account (Similar to Medicaid in the USA) for each newborn citizen with a grant of SGD 3,000 to assist parents in healthcare costs for their children.
(3) Healthcare program to cover congenital and neonatal conditions.
d. Enhancing Work-Life measures to help working couples balance work and family commitments.
(1) Annual government paid childcare leave of 6 days for children under the age of 7 and 2 days of leave for ages 7 to 12.
(2) 4 weeks of government-paid adoption leave for working mothers.
(3) Extended maternity protection period to cover the full term of pregnancy for employees who are terminated sufficient cause.
e. Signalling Fathers to play a Bigger Role.
(1) 1 week of Government paid paternity leave.
(2) 1 week of shared parental leave where the father can share the mother’s maternity leave.
While these policies have yet to increase the TFR to replacement rates, it is noteworthy that citizen’s births have remained above the past decade’s average (Strategy Group, 2017).
The shortfall, however, is addressed by the Singapore Governments Immigration Policy. They plan to take in 15,000 to 25,000 New Citizens per year and 30,000 Permanent Residents per year (National Population and Talent Division, 2013).
3. Importing Foreign Labour
When a country experiences slow or no population growth, governments can import foreign labours to make up the numbers. Foreign workers bring along with them skills and experience to complement the local workforce.
Singapore has a large foreign workforce of 1.36 million (MOM, 2018). With a total population of 5.6 million (Strategy Group, 2017); foreigners amount to roughly 28% of the total population. In Singapore, foreigners contribute above 25% of all personal income tax collected but only make up 20% of all income tax payers (Population, 2018). This shows that the foreign workforce pay above their fair share in taxes.
In Dubai, the foreign population is 83% of the total population (Emirates247, 2018). Without the foreign workforce, the UAE’s economy would be highly dependant on oil and other sectors would not develop. However, with the aid of a foreign workforce, the UAE has been able to channel its profits from oil into sectors like manufacturing, aviation and logistics. By the year 2025, the UAE projects that non-oil sectors will account for nearly 90% of the economy (Abbas, 2017).
In a nutshell, importing foreign labour is a good option for governments as they contribute to the revenue base and pay for government social programs; but at the end of their contract or when then get older, the Government does not need to support them in terms of social security as they would return to their home countries.
4. Increasing Workforce Participation Rate
To increase economic growth, governments can increase the retirement age (Tan, 2017). This would bring experience to the workforce and reduce senior’s dependence on government programs.
Another avenue to increase the workforce participation rate is to be a more inclusive society. There are disadvantaged individuals such as the handicapped and ex-offenders. These groups of people can be roped in to be productive members of society.
The Singapore Government subsidises elderly and the handicapped wages through the Special Employment Credit (SEC, 2018). Ex-offenders too will be eligible for this employment credit. This keeps them from returning to crime and aids them to join the workforce by incentivising employers to hire them (Score, 2018).
5. Fiscal Policy
Fiscal Policy is the deliberate manipulation of tax rates and government spending to achieve changes in aggregate demand (Economicsonline, 2018). What is basically means is Government Budget, Tax Revenue, Government spending and borrowing. Fiscal policy is determined by elected officials. The Parliament in Singapore or in the case of the United States, the Congress.
There are two types of Fiscal Policies, expansionary and contractionary (Rivera, 2018). When the economy is laggard, Governments can choose to run some deficit spending (expansionary); spending more than the tax revenue it is projected to bring in. This is done to stimulate growth. Governments spend on infrastructure like new ports, roads. The construction company that wins the tender gets profits, the workers they employ receive a salary. This will translate to Corporate tax and Income tax which will go back into the government coffers. The new port would have increased capacity or be more productive in turn attracting more trade. The US increased their infrastructure spending after the Great Financial Crisis in 2008 (Plumer, 2013).
As evident on the graph above, Governments increase spending during a recession to support the private sector. After the economy has improved, they will cut spending (contractionary) to consolidate and to balance their budgets.
6. Monetary Policy
One of the primary reasons for the GFC in 2008 was due to frozen credit markets (Sibun, 2008). Banks and Financial Institutions must have credit liquidity to lend to businesses. When liquidity dries up, the economy will come to a standstill and defaults will rise.
This can be avoided by sound monetary policies. Monetary policies are determined by a countries Central Bank. The US Federal Reserve manages the monetary policy primarily by adjusting short-term interest rates (Federalreserve, 2018). This in turn, would influence long-term interest rates, currency exchange rates and prices of equity and other assets.
While the United States floats their currency, Singapore manages its exchange rate via the MAS (Monetary Authority if Singapore). The MAS does not adjust interest rates but rather manage it through a basket of currencies of the city state’s major trading partners (MAS, 2018).
Regardless of how each Government chooses to manage their monetary policy, the basic premise is to manage inflation and the credit markets to ensure the availability of credit for both businesses and households.
7. Conclusion
In this report, we have gone through a few supply-side policies and demand-side policies. While a particular policy might work for one country, it might not work for another. Demand-side policies are useful to stimulate growth and get out of a rout like the Great Financial Crisis. Lowering interest rates will increase growth but it will also result in inflation. To ensure this growth is productive and sustainable, supply-side policies must be introduced alongside monetary policies. When both policies are implemented effectively, governments can achieve a robust growth and a dynamic economy that is less vulnerable to external shocks.